UBS's revamp efforts hampered by internal strife-sources

* UBS CEO seeks big cutbacks, meets opposition - sources

* UBS private bank head, Swiss chief said among opponents

* Second quarter earnings highlight need to act

* CEO Ermotti and chairman Weber seen having work cut out

By Katharina Bart

ZURICH, Oct 8 (Reuters) - Rifts among top UBSmanagers are hampering Chief Executive Sergio Ermotti's effortsto make big cutbacks, especially in investment banking,according to senior sources both inside and close to the bank.

While 52-year-old Ermotti has been scarcely visible outsidethe bank since taking over after Oswald Gruebel quit a year agoover a $2 billion trading scandal, sources in the bank say he isbusy trying to marshal support for more forceful restructuring.

By contrast, while new UBS Chairman Axel Weber is a frequentpublic speaker on the eurozone, he is criticised within UBS forhis absences at a time when senior figures are wrangling overtough strategic choices.

"Top management isn't unified at all, and that is now Weberand Ermotti's big challenge," one top UBS banker told Reuters.

Since his appointment, Ermotti removed risk head MaureenMiskovic but left investment banking head Carsten Kengeter inplace while bringing in Andrea Orcel, a prominent merger andacquisitions specialist poached from Bank of America MerrillLynch , to co-run the unit. Orcel is seen as a keyErmotti ally because the two, both native Italian speakers, werecolleagues at Merrill Lynch.

A far more cooperative-style manager than predecessorGruebel, the affable and well-dressed Ticino native Ermotti isstruggling to unite top management behind him, ahead of whatsources say could be far more dramatic restructuring moves thanthe 3,500 jobs the bank has until now said it will cut.

"Ermotti hasn't consolidated his hold on power and is bynature more collaborative than Gruebel was, which hasinadvertently fostered infighting," another UBS top banker said.

Several sources say chief among Ermotti's critics areprivate banking head Juerg Zeltner, who jockeyed for the top joblast September, and Switzerland Chief Executive Lukas Gaehwiler.

While Zeltner and Gaehwiler are not opposed to the need tomake deeper cuts at UBS, infighting has emerged as the detailsare hammered out. Specifically, proposals for morecentralisation, which would crimp the division heads'responsibility, are hotly contested.

"It is true that Sergio has ruffled some feathers,especially with people who fear their fiefdoms might becurtailed," the first UBS banker said.

Both Zeltner and Gaehwiler declined to comment to Reuters.

Some analysts expect UBS to disclose further restructuringsteps as soon as with third-quarter earnings October 30, on topof planned cuts of 2 billion francs by end 2013, much likeDeutsche Bank which is embarking on a crash diet amida dearth of business.

"I believe UBS has been very busy trying to pull costs outof the business, especially investment banking, and wouldn't besurprised if we get a mini-strategy update around third-quarterresults which gives more flesh to how much further they can goin cost-reduction", Nomura analyst Jon Peace said. He rates UBSstock at buy with a 17 franc target price.

Ermotti seemed to recently brace UBS employees andespecially investment bankers for more blood-letting.

"I don't want to lull anybody into thinking better times arecoming. Instead, I want to adjust our business model to the newreality," Ermotti told the Swiss Finanz und Wirtschaft newspapermid-September, his most recent public comments.

"We want to earn a return on equity of 12 to 17 percent forour shareholders and be our clients' first choice. We will doeverything necessary to reach that goal," Ermotti said. UBS'sreturn on equity was a paltry 4.7 percent in the first half.

UBS's share price has edged more than 7 percent higher sinceErmotti took over permanently in November, lagging the broaderEuropean sector , which has risen over 11 percent, thoughhe has bolstered UBS's capital and overseen the bank's firstdividend since 2008.

"Clearly, there still remains a lot for Weber and Ermotti todo," one of the UBS bankers said. Both men declined to comment.

A recent portrait by Swiss weekly Handelszeitung saidErmotti was a "part-time Chief Executive", distracted bydabbling in investments in his native Ticino including severalluxury hotels and a local carrier, allegations which UBS denied.

"After becoming CEO of UBS Group, Sergio Ermotti abandonedall privately held mandates, as he has confirmed publicly onseveral occasions. His financial participations do not take upany of his time," UBS said in a statement.

This week, UBS's Chief Operating Officer Ulrich Koerner, anunsuccessful Ermotti challenger for the top job a year ago, wasdubbed the "shadow CEO" of UBS by widely-read Swiss bankingwebsite Inside Paradeplatz, which referred to the COO's wideinfluence and Ermotti's lack of public profile in Switzerland.

UBS's second-quarter earnings highlighted the need forErmotti to act. Net profit missed expectations by far, fallingby more than half to 425 million Swiss francs amid a slide ininvestment banking income, including from UBS's traditionallystrong equities unit. By contrast, 9.5 billion francs in freshfunds for UBS's flagship private banking arm for the wealthyunderpinned that unit's health.

Ermotti said last year that his main aim was to restoreUBS's past lustre following the trading scandal andnear-collapse in 2008, arguing that the Swiss bank has the samepotential for a rebirth as IBM or Apple, which both returned totheir former glories following rocky patches.

But he has had limited success so far: while UBS might havebolstered its image in Switzerland by offering boat tripvouchers to celebrate its 150th year, the bank fell out of thetop 100 worldwide brands this week after successive, sharp dropssince 2008, in a ranking compiled by Interbrand.

Ermotti was careful to include the Swiss bank's employees inits 150th anniversary celebrations. UBS held a week-long seriesof parties for 1,000 staff last week in an edgy industrial venuein Oerlikon, old industrial lands in Zurich's northern suburbswhich are undergoing a building boom.

Staff supped on Asian food, sausages and bread andAelplermagronen, a frugal Swiss pasta and potato dish, makingfor an altogether lower-key affair than a February gala dinnerfor Switzerland's political and banking elite which featuredcaviar, truffles, wagyu beef, and langoustine prepared byrenowned Michelin-starred Swiss chef Philippe Rochat.

UBS's reputation as an equities powerhouse was dented by the349 million francs in losses linked to Facebook's botchedU.S. market debut in May.

The ongoing trial of former UBS trader Kweku Adoboli overlast year's scandal would seem to lend support to Ermotti'sefforts to tame the investment bank because it has highlightedhow the riskier business stands at odds with the bank'sconservative, Swiss private banking roots he is playing up inits 150th anniversary year. Adoboli's defence team have arguedthat UBS turned a blind eye to rule-breaking as long as it madethe bank money.

"I think Ermotti's managed to bring some calm back to UBSafter it was hit by the trading turmoil, but the fact is thecost issue remains," said an external consultant to UBS who isnot authorised to speak publicly.

(Editing by Emma Thomasson and Philippa Fletcher)

((Katharina.Bart@thomsonreuters.com)(+41 58 306 7312)(ReutersMessaging: katharina.bart.thomsonreuters.com@reuters.net))

Keywords: UBS/